The best way to describe the investment case for Interior Services is as a 'deep value' opportunity. The ratios most commonly used to measure value look extremely attractive. The dividend yield is forecast to be close to 7 per cent this year, while the shares trade on less than seven times earnings forecasts by house broker Numis Securities, dropping to less than six times the forecast for 2013-14. What's more, the group has net cash.
- Overseas expansion
- Targeting growth markets in UK
- Cost savings from restructuring
- Nice dividend yield
- Slump in many of its markets
- Low profit margins
However, shares only enter 'deep value' territory if a company has serious problems, and Interior Services has had its share. Yet we think the fit-out and construction company's investment merits stack up pretty well and reckon that investors can enjoy a handsome dividend underpinned by stable earnings while waiting for a cyclical recovery to boost the share price. Encouragingly, it looks like more investors are warming to this view - the share price has risen 14 per cent since Interior Services reported full-year results a month ago.
| Interior Services (ISG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 143p | MARKET VALUE: | £48m | |
| TOUCH: | 140-143p | 12-MONTH HIGH: | 185p | LOW: 107p |
| DIVIDEND YIELD: | 6.6% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 153p | NET CASH: | £25.4m | |
| Year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 1.05 | 11.8 | 30.1 | 13.7 |
| 2010 | 0.97 | 8.7 | 21.3 | 14.3 |
| 2011 | 1.17 | 10.2 | 24.4 | 15.1 |
| 2012 | 1.28 | 3.0 | 7.4 | 9.0 |
| 2013* | 1.38 | 9.0 | 20.8 | 9.5 |
| % change | +8 | – | – | +5 |
Normal market size: 1,300 Market makers: 5 Beta: 0.3 *Numis Securities forecasts (profits and earnings are not comparable with historic figures) | ||||
Let's start with the bad news, though. As chronicled by a series of profits warnings, demand for the group's services has collapsed in many of its traditional markets. For example, the public sector is reining in spending, new-build office fit-outs are scarce, and supermarkets are pulling plans for new stores. All this hurts the group. However, management feels demand has been bumping along the bottom for some time and is unlikely to deteriorate further.
The company has been adjusting to the situation by cutting costs. Measures taken resulted in an exceptional restructuring charge of £3m last year and the benefits should be seen in 2013. In particular, management closed the company's affordable housing business in south-west England, which means last year's £2.1m loss will not be repeated. This alone should offset the impact of the end of jobs related to London's Olympic Games.
Interior Services has also been investing in growth areas, such as fitting out data centres, 'innovative' office interiors and high-end residential property. The company's contract wins in these markets underpin hopes of underlying earnings growth this year, as does overseas expansion. Two acquisitions, one in Asia and one in Europe, helped quadruple international profits last year, which now account for just over a quarter of the total. Overseas orders are benefiting from moves by Interior's UK customers to expand into these markets.
As well as taking hard decisions operationally, the company made the tough call to cut the dividend to 9p in 2012. This looks like a level from which Interior Services can now build. Even at the low point in the cycle, the payment was twice covered by underlying earnings.
